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Kahn v. MFW requires controller self-disablement early

Delaware Supreme Court Clarifies Ab Initio Requirement for BJR Review https://t.co/HAgLzLGQJM Controller must self-disable before substantive economic bargaining starts

— Professor Bainbridge (@ProfBainbridge) May 1, 2019

Delaware Chief Justice Leo Strine on independent directors--I've been saying the same thing for years

From an interview of Strine at Directors & Boards:

We have a lot of unrealistic expectations for independent directors, and I think it would be better to rebalance boards a little bit. We need folks who are genuinely independent directors, but we also need directors with expertise, and we need directors who were active in business and who understand the industry. And some of the rules and incentives can get so tight that we actually discourage people with the right kind of qualities from serving on boards.

It doesn’t really matter if you’re independent if you don’t have expertise. But can you be independent and also have the expertise and the knowledge? I’m sure you can.

We just independent directorized the world. We went from having a bare majority of them to having a supermajority of them. We don’t actually empower them. We take away their ability to think long term because we put in place Say on Pay. We don’t do Say on Pay every four years or five years, where you would really have a long-term pay plan, we do it every year as a vote on generalized outrage.

Independent directors are not like trustees at universities, who usually have prior affiliations with the university and the community in which it exists, and that they care deeply about. Independent directors are weather vanes for the market. Not to denigrate them, but let’s think about the definition of an independent director. They tend to have no prior affiliation or current association with the company, and thus they really have no reason to deeply care about it or any aspect of it. Now you can say that’s independence, but it’s also a blank slate.

There’s great competition to be an independent director. Independent director pay has gone up. The typical pay just to be on one company board is higher than my judges in our judiciary. If you’re on three boards, you’re often making more than a half million dollars a year just as a director.

The old concern was that directors had to be popular with management to stay on boards, but now you have to stay popular with the institutional investor community and with the proxy advisers, and therefore these directors are highly responsive to market sentiment.

Maybe my lack of popularity with the self-appointed shareholder spokesmen who run ISS and its ilk, not to mention institutional investors generally explains my lack of board seats?

Anyway, the usually board-bashing/activist-loving folks at The Corporate Counsel observe that:

It’s refreshing to hear somebody with influence in the corporate governance debate finally say something like this. As I’ve blogged previously, my guess is that in 50 years people may really wonder why we thought it was a good idea to demand that the boards of the world’s largest corporations be comprised overwhelmingly of people with no ties to or experience with the company. Who knows? Maybe Chief Justice Strine’s remarks are a signal that we won’t have to wait 50 years for people to start asking that question.

I've been a sharp critic of independent director mandates going back to one of my first articles, see Independent Directors and the ALI Corporate Governance Project, 61 Geo. Wash. L. Rev. 1034 (1992). In my book Corporate Governance after the Financial Crisis, I wrote that:

... the board of directors has three basic functions. First, while boards rarely are involved in day-to-day operational decision making, most boards have at least some managerial functions. Second, the board provides networking and other services. Finally, the board monitors and disciplines top management.

Independence is potentially relevant to all three board functions. As to the former two, outside directors provide both their own expertise and interlocks with diverse contact networks. As to the latter, at least according to conventional wisdom, board independence is an important device for constraining agency costs. On close examination, however, neither rationale for board independence justifies the sort of one size fits all mandate adopted by the exchanges at the behest of Congress and the SEC.

After a lengthy review of the evidence on director independence, I concluded that "the empirical evidence on the merits of board independence is mixed." I then observed that:

The fetish for board independence has costs. Two are already on the table; namely, those associated with the information asymmetry between outsiders and insiders and those occasioned by the need to incent outsiders to perform. A third is the lost value of insider representation.

Oliver Williamson suggests that one of the board’s functions is to “safeguard the contractual relation between the firm and its management.”[1] Insider board representation may be necessary to carry out that function. Many adverse firm outcomes are beyond management’s control. If the board is limited to monitoring management, and especially if it is limited to objective measures of performance, however, the board may be unable to differentiate between acts of god, bad luck, ineptitude, and self-dealing. As a result, risk averse managers may demand a higher return to compensate them for the risk that the board will be unable to make such distinctions. Alternatively, managers may reduce the extent of their investments in firm-specific human capital, so as to minimize nondiversifiable employment risk. Insider representation on the board may avoid those problems by providing better information and insight into the causes of adverse outcomes.

Insider representation on the board also will encourage learned trust between insiders and outsiders. Insider representation on the board thus provides the board with a credible source of information necessary to accurate subjective assessment of managerial performance. In addition, however, it also serves as a bond between the firm and the top management team. Insider directors presumably will look out for their own interests and those of their fellow managers. Board representation thus offers some protection against dismissal for adverse outcomes outside management’s control.

Such considerations likely explain the finding by Klein of a positive correlation between the presence of insiders on board committees and firm performance.[2] They also help explain the finding by Wagner et al. that increasing the number of insiders on the board is positively correlated with firm performance.[3]

The fetish for independence cost us these potential benefits from insider representation. Congress’ refusal to permit private ordering means that those firms where those costs are highest are unable to opt out of the one size fits all straightjacket.

"Is a board of directors absolutely mandatory in a corporation/company?"

I offered the following answer to the titular question at Quora:

Section 8.01(a) of the Model Business Corporation Act (in force in over 2/3 of the states) provides that: “Except as may be provided in an agreement authorized under section 7.32, each corporation shall have a board of directors.”

In turn, section 7.32(a) provides that: “An agreement among the shareholders of a corporation that complies with this section is effective among the shareholders and the corporation even though it is inconsistent with one or more other provisions of this Act in that it: (1) eliminates the board of directors ….”

Note, however, that such an agreement must be unanimous and be made known to the corporation. It must be disclosed on share certificates.

If the agreement eliminates the board of directors, there is no prescribed replacement. As the Official Comment to section 8.01(a) states, “the shareholders of a corporation may, in an agreement that satisfies the requirements of section 7.32, dispense with a board of directors and structure the corporation’s management and governance to address specific needs of the enterprise.”

Although section 7.32 is not limited to closely held corporations, many states have limited the option of eliminating the bard of directors to closely held corporations.

Indeed, it is essentially unheard of for publicly held corporations to have such agreements and equally unheard of for publicly held corporations to eliminate the board. See, e.g., POST PROPERTIES, INC., SEC No Action Ltrs. WSB File No. 0329200417 (“It is inconceivable, for example, that shareholders of a publicly-traded company such as Post Properties would attempt to eliminate the board of directors entirely, to designate an outside person to manage its business, or to give to one of its shareholders the power to cause corporate dissolution. These limits are totally incompatible with public ownership ….”

Delaware General Corporation Law section 141(a) provides that: “The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.”

Assume a Theranos director knew what was going on, what should they have done?

DGCL § 141(b) provides that:

Each director shall hold office until such director’s successor is elected and qualified or until such director’s earlier resignation or removal. Any director may resign at any time upon notice given in writing or by electronic transmission to the corporation. A resignation is effective when the resignation is delivered unless the resignation specifies a later effective date or an effective date determined upon the happening of an event or events.

The American Bar Association’s authoritative Corporate Director’s Guidebook recommends that:

If, after a thorough discussion, a director disagrees with any significant action the board is taking, the director should consider abstaining or voting against the proposal. The director should also consider requesting that the abstention or dissent be recorded in the meeting’s minutes. Except in unusual circumstances, taking such a position should not cause a director to consider resigning. Resignations should be considered if a director believes that management is not dealing with the directors, the shareholders, or the public in good faith or that the information being disclosed by the corporation is inadequate, incomplete, or incorrect and the director is unable to convince the board to take action. Directors may also consider resigning when they feel their point of view is being disregarded entirely. Public corporations are required to disclose director resignations in an SEC filing, and this disclosure, like others, should be done in consultation with legal advisors.[1]

An earlier edition of the Guidebook stated that:

If, after a thorough discussion, a director disagrees with any significant action proposed to be taken by the board, the director may vote against the proposal and request that the dissent be recorded in the meeting’s minutes. Except in unusual circumstances, taking such a position should not cause a director to consider resigning. However, if a director believes that information being disclosed by the corporation is inadequate, incomplete or incorrect, or that management is not dealing with the directors, the shareholders or the public in good faith, the director should first encourage that corrective action be taken. If that request is not satisfied or the problem continues, the director should encourage the board to replace management and, if such a change does not occur, the director should resign.[2]

In Shocking Technologies, Inc. v. Michael,[3]the court held that:

First, fair debate may be an important aspect of board performance. A board majority may not muzzle a minority board member simply because it does not like what she may be saying. Second, criticism of the conduct of a board majority does not necessarily equate with criticism of the corporation and its mission. The majority may be managing the business and affairs of the corporation, but a dissident board member has significant freedom to challenge the majority’s decisions and to share her concerns with other shareholders. On the other hand, internal disagreement will not generally allow a dissident to release confidential corporate information.

In Wechsler v. Squadron, Ellenoff, Plesent & Sheinfeld, LLP,[4]the court held that:

Can a director of a public corporation who believes that the company is engaged in ongoing securities fraud “blow the whistle” by disclosing to the SEC information protected by the company’s attorney-client privilege, where the company’s Board has not waived the privilege? As a matter of public policy, the Court holds that the answer is yes, although the company could sue the whistle-blowing director for breach of fiduciary duty if such disclosure were not in the company’s best interest.

Should the law regard corporations as a “person”? Why or why not?

The titular question was brought to my attention on Quora, which elicited this response from yours truly:

The idea that a corporation is a legal person with constitutional rights is, of course, a controversial one. Some commentators argue that it's bad policy. In my view, however, it is a well-settled principle of US constitutional law and justifiably so.

On the one hand, the courts have never empowered corporations with "privileges of citizenship." The second clause of the 14th Amendment - the so-called Privileges and Immunities - states that: "No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States." But it is settled that the Privileges and Immunities Clause does not protect corporations, because corporations are not deemed citizens for purposes of the 14th Amendment. Western and Southern Life Ins. Co. v. State Bd. of Equalization of California, 451 U.S. 648, 656 (1981). Conversely, however, "It is well established that a corporation is a 'person' within the meaning of the Fourteenth Amendment." Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 881 (1985).

The common law had long recognized the legal personality of corporate bodies. See Book I, Chapter 18 of Blackstone, Commentaries on the Laws of England (1765-1769). But what of the Constitution?

The key case for constitutional law purposes is Santa Clara County v. Southern Pacific Railroad, 118 U.S. 394 (1886). Curiously, if one carefully reads Justice Harlan's decision in that case, one will find neither a clear statement nor a citation of authority concerning whether corporations are "persons." That point, instead, is made in the syllabus by the Reporter, who related that at oral argument the Chief Justice had stated that:

The court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of the opinion that it does.

Despite it's somewhat odd parentage, the principle is sound.

The legislative history of the Fourteenth Amendment suggests that Congress substituted the word ''person'' for the word ''citizen'' precisely so that the provisions so affected would protect not just natural persons but also legal persons, such as corporations, from oppressive legislation. We see this view further confirmed Roscoe Conkling's recounting of the relevant legislative history in Conkling's arguments in San Mateo County v. Southern Pac. R.R., 116 U.S. 138 (1885). Conkling had been a member of the Joint Congressional Committee that drafted the 14th amendment and in Southern Pacific argued to the Justices that it had been the intent of Congress for the word "person" to include "legal" persons (corporations) as well as "natural" persons within the protective scope of the due process and equal protection clauses of the amendment. The Court accepted Conkling's argument.

As Larry Ribstein argues, this development made policy sense:

... corporations are people – the owners and others the corporation represents in litigation. These people have speech rights, rights not to be discriminated against, and so forth. I’ve written on this ...:

The Constitutional Conception of the Corporation, 4 Supreme Court Economic Review 95 (1995); Corporate Political Speech, 49 Wash. & Lee L. Rev. 109 (1992) and in my book with Henry Butler, The Constitution and the Corporation (1995) ....

So the African-American owners of this SBA-certified minority-owned contractor shouldn't lose their civil rights because they chose to do business in the corporate form. They might be required to sue as a corporation, as in this case, because that’s a convenient way to handle litigation, but that doesn’t determine their individual rights.

But courts also should recognize that, by the same principle, people shouldn't lose their speech rights just because they exercise these rights though the corporation in which they have invested.

"Strine Says" on Twitter

Strine Says is a new (at least, to me) Twitter account I'm following: 

Illinois proposal to mandate gender and racial diversity on corporate boards gathers steam

Bloomberg reports:

Lawmakers in Illinois have advanced a bill that would require public companies headquartered in the state to place at least one female and one African-American director on their boards of directors.

H.B. 3394, which passed the Illinois House on March 29 by a vote of 61-27, amends the state’s Business Corporation Act and imposes various reporting duties on public companies. It also creates a compliance deadline of Dec. 31, 2020. The Office of the Secretary of State can impose penalties on companies for violations.

The bill underscores some policy-makers and diversity advocates’ heightened attempts to remake U.S. corporate boards through specific legal requirements. It could have an impact on some of the biggest corporate names on the S&P 500. Major public companies headquartered in the state include Walgreens Boots Alliance Inc., Boeing Co., Archer Daniels Midland Co., Caterpillar Inc., Allstate Corp., United Continental Holdings Inc. and McDonald’s Corp.

I am highly dubious of the constitutionality of these statutes to the extent they purport to apply to companies incorporated in other states. See my WLF post California Corporate-Board Quota Law Unlikely to Survive a Constitutional Challenge. I'm also dubious of these statutes on the merits. The initial empirical study of the California statute found that:

On September 30, 2018, California became the first U.S. state to introduce a mandatory board gender quota for all firms headquartered in California. We find that the introduction of the quota is associated with significantly negative announcement returns for these firms. Consistent with the quota imposing frictions, the effect is larger for firms requiring more female directors to comply with the quota and for firms with poor corporate governance. We also document negative spillover effects to non-Californian firms. They are larger for firms operating in industries in which Californian firms lack more female directors, suggesting that valuable female directors may migrate from non-Californian to Californian firms. We also document negative spillover effects for firms headquartered in states that are more likely to follow California’s lead. These are firms headquartered in states dominated by the Democratic Party and states which followed California’s lead in legalizing cannabis consumption and raising minimum wages exceeding the federal rate. Finally, we show that, already as of month-end December 2018, female representation on the boards of Californian firms increased. Newly appointed female directors are younger, less experienced, and less independent than incumbent and leaving directors.

von Meyerinck, Felix and Niessen-Ruenzi, Alexandra and Schmid, Markus and Davidoff Solomon, Steven, As California Goes, So Goes the Nation? The Impact of Board Gender Quotas on Firm Performance and the Director Labor Market (February 22, 2019). Available at SSRN: https://ssrn.com/abstract=3303798 or http://dx.doi.org/10.2139/ssrn.3303798

I'm also puzzled by the decision to limit quotas to African-Americans. What about other under-represented minorities? I'm not enough of a constitutional lawyer to know if that will affect judicial review of the statute under the Equal Protection Clause, but I'm guessing it won't help.

Is it possible for a single majority shareholder who owns the company take his own company to court?

I saw the titular question over at Quora and offered the following answer: Probably not. See Justice Marchall’s dissent in Bangor Punta Operations, Inc. v. Bangor & A. R. Co., 417 U.S. 703, 721 (1974): "The sole shareholder who defrauds or mismanages his own corporation hurts only himself. For the corporation to sue him for his wrongs is simply to take money out of his right pocket and put it in his left." That is the reverse situation, of course, but I suspect it would be the same result.

 

 

Keith Sharfman and Bill Carney on Aruba and appraisal arbitrage causes me to ask "why not just abolish appraisal"?

They begin with a brilliantly concise statement of the problem:

The corporate law world has been abuzz of late about the commendable effort by Delaware’s courts to scale back “appraisal arbitrage”: a trading strategy predicated on deal dissenters receiving via appraisal litigation more for their shares than the deal prices from which they dissent. For years, parties engaging in appraisal arbitrage enjoyed the opportunity to initiate essentially risk free appraisal litigation with substantial upside potential, because it was assumed by courts and litigants that “fair value” entitled dissenters to at least the price of the deal they were rejecting and potentially more. But happily, this misunderstanding and misapplication of the law of appraisal now appears finally to have reached its end.

They continue:

The Court of Chancery Court then struck yet a further blow in 2018 in its appraisal decision in Verition Partners Master Fund, Ltd. v. Aruba Networks, Inc., which awarded deal dissenters even *less* than the deal price. Relying on a previously underenforced provision of Delaware’s appraisal statute, Section 262(h), which excludes from fair value any value that is uniquely associated with the deal from which appraisal-seeking shareholders dissent, the Court of Chancery awarded to the dissenters as fair value only their shares’ public trading price prior to the deal’s announcement.

They go on to discuss various aspects of the debate. Do go read the whole thing. And then answer me this question: Why not just abolish appraisal?

I also commend to your attention my post from 2012 on appraisal.

A few comments on the not very interesting result that CEOs historically have given a lot of money to Republicans and the agenda for which it will be deployed

Atrios breathlessly reports on a "first of its kind" (!) study showing that "CEO political donations favor GOP." [Insert obligatory Casablanca reference here.]

The study, by professors from Harvard Law School [which is important because Harvard is Harvard and that makes anything better] and Tel-Aviv University, classifies a CEO as a Republican or a Democrat if they gave at least two-thirds of their campaign contributions to one party or the other. CEOs that distributed their contributions more evenly between the two major parties were classified as neutral.

The study is by Alma Cohen, Roberto Tallarita, Moshe Hazan and David Weiss, and is up at SSRN. They look at campaign contributions by "public-company CEOs during the 18-year period of 2000 - 2017."

Although the study claims to be politically neutral, including with respect to the issue of mandating corporate disclosure of political campaign spending, it's worth noting that Cohen and Tallarita are both proteges and co-authors of Lucian Bebchuk, and I strongly suspect their study will be deployed by Bebchuk and others to once again argue in favor of mandating corporate disclosure of political campaign contributions. Why Bebchuk and his proteges are so determined to help Democratic politicians defund Republicans continues to puzzle me, but so be it.

My principal reaction to the paper, however, is to ask "so what?" The interesting divide in American politics these days is not between "Republican" corporate elites and "Democrat" corporate elites, but between elites and non-elites. This was the principal focus of my recent Pound Lecture, of course, which you can view here. On a growing set of issues, the GOP base -- i.e., the people who joined the Tea Party and voted for Donald Trump -- are at odds with the Business Roundtable types about which the study is exclusively concerned.

Obviously, there are plenty of leftwing CEOs like Salesforce.com CEO Marc Benioff, for example, who promote progressive social activism. But we increasingly see nominally Republican CEOs with impeccable Business Roundtable credentials using their names and corporate muscle to campaign directly against GOP base-supported laws governing social issues. 

In an important recent contribution to the legal literature on corporate activism, Tom Lin discusses in detail the widespread hostile reaction by major corporations to North Carolina’s so-called “Bathroom Law” and various early Trump administration initiatives.  They serve as leading examples of what he calls “unprecedented contemporary corporate social activism.” I'd also mention a Francis Pileggi post from May 2016, in which he observed that:

Yesterday’s Wall Street Journal featured a front page article about an apparently increasing number of CEOs of public companies who use their companies’ resources, and wield their companies’ resources as a sword, to advocate in their official corporate capacities to advance their favorite social agendas–or to oppose legislation on social policies that they disfavor.

In other words, all the interesting action these days is taking place at the growing rift between CEOs who simultaneously are crony capitalists and social justice warriors on the one hand and the folks Joel Kotkin calls the American yeomanry. 

So here's what I think is the interesting story: Yes, CEOs historically gave a lot of money to Republicans, which is not surprising in the slightest, because the Republicans were (slightly) more pro-big business and pro-rich people than the Democrats. The DC GOP elite have long been bought and paid for by corporate America. But what about the future? Trump's election infuriated large swaths of the Business Roundtable CEO community. Since Trump took office, the split has become even more obvious: How many of the CEOs in the study do you think support Trump's policy on the border wall, immigration, trade, etc.., let alone hot button social issues? Will lower taxes and reduced red tape be enough to keep CEOs in the Republican coalition? On these issues, the authors are silent.

To be sure, one almost might feel sorry for the corporate titans, who increasingly look homeless. Neither the Trump Base nor the progressive wing of the Democratic Party are particularly fond of them. I'd bet a lot of them were pondering Joe Biden until his history of being handsy caught up with him this week.

Bainbridge & Henderson's Outsourcing the Board in Quartz

Quartz published a long article on my book with Todd Henderson, Outsourcing the Board. Sadly, it's behind a paywall. But you can buy the book!

Nike, Avenatti, and the Business Judgment Rule

Josh Fershee takes on the titular topic here

A couple of comments on Kent Greenfield's amicus brief in Washington vs. Arlene's Flowers and Ingersoll vs. Arlene's Flowers

Kent Greenfield has posted an amicus brief he submitted in pending religious freedom litigation in the State of Washington: Brief for Professor Kent Greenfield As Amicus Curiae in Support of Respondents, State of Washington vs. Arlene's Flowers and Ingersoll vs. Arlene's Flowers. 

This amicus curiae brief addresses a fundamental state-law premise of Appellants’ constitutional claims that has gone largely unexplored in the prior briefing: whether Arlene’s Flowers, a Washington for-profit corporation, may obtain an exemption from generally applicable laws based on the religious beliefs of a shareholder, Mrs. Stutzman. Citing the U.S. Supreme Court’s decisions in Burwell v. Hobby Lobby Stores and Masterpiece Cakeshop, Ltd. v. Colorado Civil Rights Commission, Appellants assert that “Arlene’s free-exercise rights are synonymous with Mrs. Stutzman’s.” Those two cases, however, had nothing to do with Washington corporate law and took no stance on the authority of Washington corporations to raise constitutional claims of their shareholders. The assertion that Mrs. Stutzman’s rights are synonymous with the corporation depends on Washington state law and runs counter to the foundational Washington corporate law principle, expressed in Grayson v. Nordic Constr. Co., that “[a] corporation exists as an organization distinct from the personality of its shareholders.”

This amicus curiae brief addresses the significance of corporate separateness to Washington’s law of corporations and explains how Appellants’ arguments rest on a conflation of those distinctions. This Court’s consideration of the constitutional claims in this case will be aided by a full understanding of these important, antecedent aspects of Washington law.

A couple of thoughts. First, although Greenfield does a commendably thorough job of analyzing what Washington state courts say about veil piercing, I'm not convinced Washington courts practice what they preach. The empirical evidence suggests that courts applying Washington state corporate law in fact pierce the corporate veil with not inconsiderable regularity. Bob Thompson's famous 1991 study found that Washington courts pierced in 44.44% of the cases (table six on p. 1051). Importantly, the national pricing rate was 40.18% (table one on p. 1048). And over 30 states had lower piecing rates than Washington (table 6 on p. 1051). To be sure, there were only 27 Washington cases in his database, which makes drawing firm statistical conclusions difficult, but 44% is still 44%. And Washington was still above the national rate and there were still a lot of states with lower piercing rates.

Peter Oh's 2010 study found an almost identical piercing rate by courts applying Washington law at 44.93% (table 6 at p. 116). His study did suggest that Washington law was slightly more reticent about veil piercing than the national norm, as 25 states had a piercing rate of 50% or higher (p.114). Overall, state courts pierced 48.89% of the time (table 5 at p.112), which puts Washington law slightly below the norm.

Even so, however, the bottom line would seem to be that courts applying Washington state law are not as reluctant to pierce as their rhetoric claims.

Second, it is certainly true that I am not a fan of the veil piercing doctrine. Oh's claim that "Stephen Bainbridge ... despises veil-piercing" (p.96) puts it a tad more strongly than I might, but it's not an unfair comment.

Having said that, however, I continue to think that courts would do well to adopt the doctrine of reverse veil piercing as a tool for deciding when a corporation may assert constitutional religious freedom claims on behalf of its shareholders. To put it crudely, veil piercing stinks, but it stinks less than the other options.

in my article, Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers, which was published in The Green Bag, Vol. 16, No. 3, Spring 2013, and is available at SSRN: https://ssrn.com/abstract=2229414, I argued that:

Reverse veil piercing (RVP) is a corporate law doctrine pursuant to which a court disregards the corporation’s separate legal personality, allowing the shareholder to claim benefits otherwise available only to individuals. The thesis of this article is that RVP provides the correct analytical framework for vindicating certain constitutional rights.

Assume that sole proprietors with religious objections to abortion or contraception are protected by the free exercise clause of the First Amendment and the Religious Freedom Restoration Act (RFRA) from being obliged to comply with the government mandate that employers provide employees with health care plans that cover sterilizations, contraceptives and abortion-inducing drugs. Further assume that incorporated employers are not so protected. This article analyzes whether the shareholders of such employers can invoke RVP so as to vindicate their rights.

At least one court has recognized the potential for using RVP in the mandate cases, opining that these cases “pose difficult questions of first impression, including whether it is “possible to ‘pierce the veil’ and disregard the corporate form in this context.” The court further opined that that question, among others, merited “more deliberate investigation.” This article undertakes precisely that investigation.

Invoking RVP in the mandate cases would not be outcome determinative. Instead, it would simply provide a coherent doctrinal framework for determining whether the corporation is so intertwined with the religious beliefs of its shareholders that the corporation should be allowed standing to bring the case. Whatever demerits RVP may have, it provides a better solution than the courts’ current practice of deciding the issue by mere fiat.

In my subsequent article, A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobby and Conestoga Wood, 100 Virginia Law Review Online 1 (2014), available at SSRN: https://ssrn.com/abstract=2399638, I took on 44 corporate and criminal law professors (including Greenfield), arguing that:

The Patient Protection and Affordable Care Act (ACA) effected numerous changes in the legal regime governing health care and health insurance. Among the ACA’s more controversial provisions is the so-called contraceptive mandate, which requires employer-provided health care insurance plans to provide coverage of all FDA approved contraceptive methods.

On March 25, 2014, the Supreme Court will hear oral argument in the Hobby Lobby and Conestoga Wood cases, in which the shareholders of two for-profit family-owned corporations argue that requiring them to comply with the contraception mandate violates the Religious Freedom Restoration Act.

Forty-four law corporate law professors filed an amicus brief in these cases, arguing that the essence of a corporation is its “separateness” from its shareholders and that, on the facts of these cases, there is no reason to disregard the separateness between shareholders and the corporations they control. The Brief is replete with errors, overstated claims, or red herrings, and misdirection.

Contrary to the Brief’s arguments, basic corporate law principles strongly support the position of Hobby Lobby and Conestoga Wood. In particular, the doctrine known as reverse veil piercing provides a clear and practical vehicle for disregarding the legal separateness of those corporations from their shareholders and thus granting those shareholders standing to assert their free exercise rights.

In it, by the by, I passed along what I thought was a particularly keen observation by a prominent practitioner:

Corporate law expert Keith Paul Bishop conducted a thought provoking analysis of the Brief by substituting “social responsibility” for “religious” in some of the Brief’s most breathless passages. He notes that, if the transfer of stockholder religious beliefs to the corporation would be ‘overwhelming,’ why wouldn’t the same be true of beliefs regarding climate change, the environment, or other beliefs animating the corporate social responsibility movement?” Keith Paul Bishop, 44 Law Professors Make A Case Against Corporate Social Responsibility, California Corporate & Securities Law Blog (Feb. 10, 2014), http://calcorporatelaw.com/2014/02/44-law-professors- make-a-case-against-corporate-social-responsibility/. He concludes that, “[i]f corporations can’t have religious beliefs, then it follows that they can’t believe in climate change, sustainable investment or any other beliefs embraced by the corporate social responsibility movement.” Id.

Indeed.

Note that I am emphatically not taking a position on how the pending cases should come out. I have not grappled with, among other things, the procedural posture of the cases. Greenfield may well be correct in his arguments about the factual specifics of those issues. indeed, given that he's a careful scholar, I assume he is.

Given that courts applying Washington law pierce almost half the time, however, to the extent veil piercing is at issue in these cases perhaps the Washington courts should consider reverse veil piercing as a way of solving the basic legal problem.

Video of my talk on corporate purpose in a populist era as the 2019 Pound Lecturer at University of Nebraska Law School

Link

Delaware Supreme Court mum at Aruba appraisal oral argument. Also, what's the point of appraisal in the case of a public held target any more?

Last year (Feb 18), VC Travis Laster issued an appraisal decision in re Aruba Networks, which found that the deal price of $24.67 was fair in light of the unaffected market price of Aruba stock of $17.13. He explained:

The Delaware Supreme Court’s decisions in Dell and DFC endorse using the market price of a widely traded firm as evidence of fair value. As in Dell and DFC, the market for Aruba’s shares exhibited attributes associated with the premises underlying the efficient capital markets hypothesis. Under Dell and DFC, these attributes provide sufficient evidence of market efficiency to make Aruba’s stock price “a possible proxy for fair value.” Aruba’s thirty-day average unaffected market price was $17.13 per share. ...

... When the merger consideration of $24.67 per share is compared to the unaffected market price of $17.13 per share, it is not possible to say that Aruba’s stockholders were exploited. The deal price therefore provides reliable evidence of fair value.

The Dell and DFC decisions recognize that a deal price may include synergies, and they endorse deriving an indication of fair value by deducting synergies from the deal price. The respondent’s expert cited a study that provides data on the base rates at which targets successfully extract a share of anticipated synergies from acquirers. Using that data, this decision arrives at a midpoint valuation indication for Aruba of $18.20 per share. ...

In this case, the best evidence of Aruba’s fair value as a going concern, exclusive ofany value derived from the merger, is its thirty-day average unaffected market price of $17.13 per share. I recognize that no one argued for this result. I also recognize that the resulting award is lower than Aruba’s proposed figure of $19.75 per share.

Not to mention being more than $7 below the deal price.

The opinion further reminds us that dissenting shareholders are not entitled to have the appraised value include either synergies created by the merger or any reduction in agency costs from the merger. Both of these are elements of value arising "from the accomplishment or expectation of the merger.” I continue to find it rather odd that appraisal would exclude such considerations, since synergies and reduced agency costs are often the chief motivating factors behind an acquisition. But their exclusion stems from the rather absurd notion that the purpose of appraisal is to give the dissenting shareholder what he would have gotten if the merger had never happened as opposed to a fair control premium.

One wonders why anyone continues to opt for appraisal in the case of an acquisition of a publicly traded target, given that the odds of getting less than the merger price are now quite high. 

In any event, the Delaware Supreme Court heard oral argument on the case this week. And no justice asked a question. Talk about a cold bench!